UNIVERSITÄT POTSDAM - Prof. Dr. Paul JJ Welfens

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While telecommunications has been a traditional part of the Old Economy, it became a major part of the New Economy in the 1990s. The main reason is that the dismemberment of AT&T in 1984 and pro-competitive laws (in the US in 1996 and in the EU related to the deregulation date 1998) have stimulated competition and technological dynamics in this field; moreover, privatization of incumbent operators has further contributed to innovation dynamics since telecom operators which face declining telecommunication prices in a more competitive environment naturally try to raise revenue by product innovations and new services. Part of the high-technology dynamics in telecommunications is, however, not covered by patents. Advanced software plays a key role in both fixed and mobile telecommunications. The innovation race has been stimulated in European fixed line telephony and in mobile telecommunications by many US operators investing in joint ventures. By contrast, only a few European network operators have invested in the US. The British Vodafone has been a successful investor. Deutsche Telekom’s acquisition of Voicestream - one of the three US cellular companies using GSM - is an important case since it shows that GSM technology, which has been the hallmark of EU mobile telecommunications can be rolled out successfully in the US. However, Voicestream is only No. 6 in the large US mobile telephony market; if Congress should block moves of Deutsche Telekom to acquire other mobile operators Germany`s leading network operator might have to pull out of North America which would be to the disadvantage both of Deutsche Telekom and to customers in the US and Canada. While US operators can easily acquire EU telecommunications operators EU firms face broad restrictions in the US and Canada; since part of the digital information market is a global marketplace such asymmetries do not reflect a level playing field and impair global market integration and industry consolidation. With share prices in Worldcom falling strongly in 2002 – after announcing of improper accounting which had overstated profits – the US telecommunication sector might face strong pressure for further consolidation. In Europe former monopoly operators also are facing problems as a consequence of falling profit rates and declining ratings which have forced many privatized operators to scale back earlier investment plans. The growth of the internet could create a virtuous circle between the telecommunications sector and the technologically highly dynamic computer industry, governed by Moore’s law that the power of chips can be doubled every two years without significant cost increase. The internet plays a crucial role here not only as a novel service, but the internet protocol also has an important role in that it is now increasingly used by fixed network operators to build new digital networks. 4
1.3 Taking Stock: Transatlantic Growth Differential In the period 1991-2000 the United States (US) recorded a formidable growth rate of about 3% p.a. where a considerable impulse for high and sustained growth stems from high investment in information and communication technology (ICT). Between 1993 and 2000 the US even recorded 4% growth where the acceleration in labor productivity growth in the second half of the decade was quite remarkable. Roughly one-half of investment growth in the second half of the 1990s can be attributed to ICT which mainly is comprised of telecommunications and computers/PCs plus software. Euroland by contrast has grown only by about 2% in the period 1991-2000 where the large core countries of Germany, Italy and France have not even achieved 2%; Germany`s growth rate in 1992-2001 was 1.5% while that in partner countries in the euro zone was 2.3% - hence reunited Germany recorded relatively low growth (with no improvement in the late 1990s compared to the first half of the decade). Given the long and strong economic upswing in the US in the 1990s, it was rather surprising that the inflation rate has remained very low in the US. Obviously, the nonaccelerating inflation rate of unemployment has reduced in the US, but it is rather unclear why this should be the case. The economic upswing in the euro zone in 1999/2000 was rather modest, and already in 2001 the growth rate of Euroland fell below 2%. The EU has had lower investment growth than the US and also has failed to position itself adequately in the changing global innovation race (WELFENS ET AL., 1998; WELFENS ET AL., 1999). However, one should not overlook remarkable intra-EU differences in economic growth; the UK, Ireland, Spain, Portugal, the Netherlands, Finland and Sweden recorded higher growth than the three EU core countries Germany, Italy and France. With the US – after the end of the Cold War – no longer devoting roughly 55% of its R&D budget to the military, the international innovation race has accelerated and increasing specialization should have been realized in EU countries. Empirical studies point, however, to technological despecialization in OECD countries in the 1990s (JUNGMITTAG ET AL., 1998). Given intensified technological competition Schumpeterian rents in medium-technology-intensive sectors can be expected to have reduced so that rates of return for the respective German firms might have fallen. At the same time the R&D conversion process in the US, France and the UK after 1990 has stimulated technological upgrading in the civilian tradables sector which lets one expect that profitability and stock market performance in those countries should improve relative to Germany – and to Japan which is the other G-5 country which had a tradition of devoting more than 90% of R&D funds to civilian markets. Focusing on Euroland’s performance relative to the US the negative German developments together with the positive French civilian R&D dynamics might cancel out; at the bottom line the structural R&D effect of the end of the Cold War seems to have worked in favor of the US. 5
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JONES, C.I. and WILLIAMS, J.C. (199
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ROMER, P.M. (1990), Endogenous Tech
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Appendix: Methodological Issues in
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Tab A3: ICT Sectors in Europe and t
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Tab A6: Sectoral Developments in th
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UNIVERSITÄT POTSDAM - Prof. Dr. Paul JJ Welfens

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